Deciding whether to invest or be a hard money lender

[Adam Peacock]

So as I was reading the forums where hard money lenders were being researched, a thought struck me. I am a high earner and have maybe $150k extra cash per year to invest. If I were to use that cash to invest in buying homes, that carries one set of challenges and a correlating set of probable profit expectations. But if I were to start lending my money to others at say 12%, that seems it would be far easier and a higher return.

Can someone check my math and tell me if I've calculated this correctly?

Pasted from Excel

$ 50K	Per loan average
3	Est funds per year
12%	Rate
Year	Principal Balance + Profit
1	$ 168,000.00
2	$ 336,000.00 (reinvesting principal + interest from prior year)
3	$ 672,000.00
4	$ 1,008,000.00
5	$ 1,344,000.00
6	$ 1,680,000.00
7	$ 2,016,000.00
8	$ 2,352,000.00
9	$ 2,688,000.00
10	$ 3,024,000.00

If my math above is in fact correct, are there resources to learn more about operating as a hard money lender? Are there methods that would result in a higher return than that shown above?

//adam

[Ryan Blake]

@Adam Peacock

You have some small flaws in the math. The largest being is you are expecting a 100% rate of having your money in use. Just like a rental owner needs to account for vacancy, a hard money lender needs to account for down time in their investment.

You are not including some basic expenses the biggest one being marketing.

As an active HML, I can tell you that the average size of our 548 loans we wrote last year were $135k. This means you would only be able to draft about one loan at a time and would have some excess cash that may never be used for the entire year. This also means that you will be turning a lot of people away. If you can only write one loan the first year, 2 the second and maybe 4 the 3rd year, you will be turning a lot of people down and they will be instead building relationships with other more stable HMLs. Again, the group I work with is considered somewhat small and we have access to $120 million that we lend out.

Final thing I think that is getting missed is your foreclosure/non-preforming rate. Depending on which state you are in it can take 2 months up to 2 years to foreclose all the while you as the mortgagee will be responsible for the back taxes when you take the property over. We very very rarely turn a profit when we have to foreclose on a property.

Suggestions: Offer a lower rate than HMLs in your area, like 10%. Charge 1 point or less (you hadn't calculated points), and make sure the closing fees you use will cover your legal expenses for each loan. Based on returns that I see I would suggest using somewhere around 8 - 9.5% as an expected annual return given the interest and point I suggested.

Hope this helped shed a bit of light on things.